Federal legislation signed into law on July 4th alters how the adoption tax credit works. Specifically, the newly enacted law makes the adoption tax credit refundable up to $5,000. Not previously refundable, this tax credit will allow everyday families more access to adoption in light of the rising cost of living. The National Council For Adoption (NCFA) has publicly praised this change in tax law.
How The Refundable Adoption Tax Credit Works
Adoptive parents may claim specified amounts of items identified as qualified adoption expenses to lower their federal tax liability. For Tax Year 2025, the maximum allowable tax credit for qualified adoption expenses for an eligible child is $17,280. For those with low tax liability that does not reach that amount, the IRS will issue up to a $5,000 refundable credit. A taxpayer can receive a part of the adoption tax credit as a tax refund even if their tax liability is zero. By indexing the tax credit to inflation, it provides incentive for pursuing adoption to grow families.
The adoption tax credit does not financially benefit those with high incomes. Only taxpayers with a modified adjusted gross income (MAGI) under $259,190 qualify for the maximum amount of the adoption tax credit in Tax Year 2025. Above that amount, the tax credit starts to phase out with no credit available after MAGI hits $299,190.
Eligible Children And Types Of Adoption Covered
The adoption tax credit is available for each child adopted. So, if parents adopt twins or a sibling group of two, they may claim two separate tax credits. The tax credit applies broadly across the spectrum of adoption cases, encompassing domestic private adoption, international adoption, and public foster case. Nevertheless, it does not include stepparent adoption.
The tax benefit may extend to cover adoption-related expenses for certain adoptees. Eligible children are those who are under the age of 18, have a special need as determined by a state welfare agency, or are physically or mentally disabled and unable to care for themselves.
Help Paying Qualified Adoption Expenses
The Adoption Tax Credit provides financial assistance with specified adoption-related costs. To obtain this help, a taxpayer must complete Form 8839. This form requires information about qualified adoption expenses and any employer-provided adoption benefits. The tax break does not cover any employer-reimbursed expenses.
Allowable adoption-related expenses are known as qualified adoption expenses. These expenses include items such as legal fees paid to your attorney, court costs, re-adoption expenses for a foreign child, and adoption agency fees. Traveling costs, including food and lodging, directly related to the adoption process also qualify.
Changes To Tax Credit Benefit Adoption
Enhancement of the existing Adoption Tax Credit provides financial assistance to those seeking to adopt children needing a permanent family. Within its parameters, lower-income families receive the most monetary help and are given incentive to pursue adoption. Expanding the pool of prospective adoptive parents increases the odds of finding forever homes for children thereby benefitting not only adoption but society as a whole.